Mills and Vines just received a bid from a supplier for 6,000 motors per year used in the manufacture of electric lawn mowers. The supplier offered to sell the motors for $88 each. Mills and Vines’s estimated costs of producing the motor follow.

Direct materials ………………..        $40

Direct labor ……………………              20

Variable overhead …………….          20

Fixed overhead ……………….            64

Prior to making a decision, the company’s CEO commissioned a special study to see whether any decreases were possible in fixed overhead costs. The company would avoid two setups, which would reduce total spending by $10,000 per setup. One inspector would be laid off at a savings of $28,000. A person in materials handling could also be laid off at a savings of $20,000. Engineering work would be reduced by 500 hours at $15 per hour. Although the work decreases by 500 hours, the engineer assigned to the motor line also spends time on other products.

REQUIRED

A. Ignore the information from the special study. Create a schedule that shows the difference between these two alternatives.

B. Repeat the analysis, using the information from the special study.

C. Identify and discuss any qualitative factors that would affect the decision, including strategic implications.

D. After reviewing the special study, the controller made the following remark: “This study ignores the additional activity demands that purchasing the motor would cause. For example, although the part would no longer be inspected on the production floor, we will need to inspect the incoming parts in the receiving area. Will we actually save any inspection costs?” Discuss whether you agree with the controller. Identify and explain other costs that might increase if the part is outsourced.